Chesapeake to sell acreage to Sinopec for $1 bln

BenLefebvre

--Deal would help Chesapeake bridge cash shortfall

--Sinopec gains another foothold in U.S. oil patch

--Deal value less than what some analysts expected

(Updates with details and analyst quote.)

Chesapeake Energy Corp.
CHK, -1.63%
has agreed to sell a stake in its Mississippi Lime play to Sinopec International Petroleum Exploration & Production Corp. for $1.02 billion in cash as the natural gas company aims to focus on developing its profitable liquids-rich plays.

The deal fulfills a nearly yearlong pledge by Chesapeake to sell at least a stake in the northern Oklahoma oil and gas field to help it bridge a $4 billion cash shortfall this year. Chesapeake, the second-largest natural gas producer after Exxon Mobil Corp. (XOM), is still reeling from a collapse in U.S. natural gas prices and attempting an expensive shift to more profitable oil drilling.

It would also increases state-owned Chinese oil and gas producers' rapidly expanding foothold in the North American oil patch. Sinopec entered a $2.5 billion joint venture with Devon Energy Corp.
DVN, -2.50%
in January 2012 to drill in oil and gas fields in the U.S. Midwest, while Cnooc Ltd.
CEO, -0.58%
which just concluded a $15 billion takeover of Canada's Nexen Energy in the largest overseas acquisition by a Chinese state-owned energy company, and in 2010 and 2011 bought stakes in Chesapeake Energy Corp.'s oil-rich shale fields in south Texas, as well as fields in Colorado and Wyoming.

"We are excited to announce the execution of our Mississippi Lime joint venture with Sinopec, which moves us further along in achieving our asset sales goals and secures an excellent partner to share the capital costs required to actively develop this very large, liquids-rich resource play," Chesapeake's Chief Operating Officer Steven C. Dixon said.

Chesapeake and other natural gas producers have been hurt by a natural-gas glut resulting from their use of hydraulic fracturing, or fracking, to produce gas from shale formations. The resulting production surge caused prices to collapse and their revenue to shrink, forcing Chesapeake to sell more than $10 billion in assets last year to make ends meet.

Chesapeake put the Mississippi Lime up for sale in 2012. The area is an increasing target for companies using fracking techniques in search of oil, but so far there has been only moderate success.

That may have contributed to what at first glance looks like a heavily discounted price for the acreage, said Hsulin Peng, an analyst at Robert W. Baird & Co.

Upon close of the deal, expected in the second quarter, Sinopec would receive a 50% undivided interest in 850,000 of Chesapeake's net oil and natural gas leasehold acres in the Mississippi Lime.

Chesapeake will get 93% of the acquisition price when the deal closes. Payment of the remainder will depend on certain customary title contingencies.

All future exploration and development costs in the joint venture will be shared proportionately between the two companies with no drilling carries involved.

As the operator of the project, Chesapeake will conduct all leasing, drilling, completion, operations and marketing activities for the joint venture.

Production from the assets, including Mississippi Lime and other formations, net to Chesapeake's interest and prior to Sinopec's purchase, averaged about 34,000 barrels of oil equivalent per day in the fourth quarter.

Earlier this month, Chesapeake said its fourth-quarter earnings fell 36% as the natural-gas company was hurt by debt-buyback expenses a natural gas prices 20% lower than at the end of 2011.

Shares fell 1.8% to $20.13 in recent trading. The stock has risen 23% so far this year through Friday's close.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.